Welfare state `has reached crisis point'

The welfare state has been a catastrophic failure and the state should stop funding anything beyond a minimum safety net, according to a provocative new paper. Rather than divert resources from social security to health and education, as the Government plans, it should slash taxes and let people pay for their own welfare services.

The suggestion comes from historian Robert Skidelsky in a paper published today by the Social Market Foundation. He is to present it at a conference due to be attended by Frank Field, Minister for Welfare Reform, tomorrow.

The paper's diagnosis of the problem, although not its solution, has much in common with Mr Field's analysis, set out in a series of books and papers when he was just a maverick backbench opposition MP.

Lord Skidelsky argues that the welfare state has reached a crisis because voters have become increasingly unwilling to pay taxes to fund increased spending. The reason is there has been too much incentive to cheat the system, making poverty self-perpetuating and creating "an apparently insatiable demand" for state support.

His proposed solution is the abolition of National Insurance contributions. The average taxpayer would gain about 20p in the pound as a result, and could afford to pay for private insurance against unemployment and old age, and for private education and healthcare.

The Government's job would be to run a stable economy with high employment, and to provide through much lower taxes a minimum level of social security and basic services. "High employment is the most basic type of social security and by far the cheapest," he writes.

Lord Skidelsky addresses the argument that public provision of health, for example, is cheaper and more efficient than private insurance, saying: "Cost control achieved by screwing down public sector pay and rationing custom by queue or exclusion undermines its morality and legitimacy."

He concludes that the welfare state has not abolished poverty or inequality, and has created permanent budget deficits. These deficits prevent governments from stabilising the economy.

The paper proposes a two-tier system of a tax-financed safety net topped up by low levels of compulsory private insurance. People who could afford extra insurance or private purchases would be able to spend more.

The paper argues against the Government's plans to redirect public spending from social security to health and education. The demand for these two categories rises faster than national income. Public spending is unlikely to be able to keep up, leaving the perpetual perception that they are "underfunded".